Recent Couch Potato commentary discussed the S&P index P&F chart signaling the index remains below its near-term downtrend (red) line. The updated chart below shows the downtrend line held as firm resistance and the S&P 500 actually started a new downtrend (column of 'O's on the far right). As discussed in recent articles, technically, until there is confirmed break above the downtrend (red) line, the index remains in a near-term downtrend. Also, keep in mind that the longer a trend continues, it becomes more difficult to reverse.
Stocks recent pullback notwithstanding, the market still appears to be desperately looking for a reason to head higher. The best bet is probably range-bound trading. There is not going to be a 'grand bargain' on the fiscal cliff negotiation. Whatever budget settlement the White and Congress decide will probably provide a quick boost to the market, but this may turn to be a 'sell the news' event in the longer term. If the bears somehow are able to seize control of the market, expect stocks to drop to near longer term support before prices recover. Take a gander at the S&P 500 index weekly chart below. Notice that the few times this year that the price pulled back significantly, the 50-week MA acted as firm support. Also be aware that the current 50-week MA basically intersects with the 200-day SMA and if this level holds up as firm support the range-bound trading bet is a reasonable scenario. However if the index price breaks below support this would be considered a serious technical breach and we need to start thinking about the possibility of a full blown price correction.
Following up on recent comments "....The Volatility Index (VIX) chart below indicates that trading volatility started accelerating this past week. Don't be surprised if volatility remains high ...Unless the unexpected happens and a budget deal is announced, there could be some heavy selling pressure...fiscal cliff budget negotiation stalemate contributed to sending volatility soaring on Friday. Volatility should be expected to remain elevated with continued triple-digit daily price moves until a confirmed budget deal is announced..." The updated chart below confirms the VIX is still soaring higher as it is not been at this level since the beginning of last summer. We mentioned how at this point, stocks are being driven by emotion. It appears that the longer and more entrenched the budget negotiation impasse, higher the volatility with corresponding downward pressure on stock prices.
With only one trading day left in the year for the most part traders have closed their books for the 2012. The chart below suggest that over the past week or so investors have been playing it safe by dumping stocks they don't want in their year-end inventory and parking the money in treasury bonds.
The chart below signals investors are playing safe heading into next year. Inflation still is not a concern, as traders pour funds into treasury bonds at the expense of selling equities and gold (which is considered a hedge against inflation). However the ongoing budget battle plays out between the White House and Congress, it is reasonable to expect significant budget cuts. Extensive cuts to the federal budget equates to a decrease in the demand side of the economic equation, leading to lower prices and a potential recessionary environment.
SPY Position Update ---------------------------------------------------------------
SPY closed at $140.03 on Friday
The December 27th Couch Potato published a January expiration SPY bull put spread. In setting up the trade we noted "... if prices drop sharply then we will probably initiate the put spread at a lower strike prices..." As confirmed in the chart above, the price gapped down the next day and we were able to execute the trade at lower strikes prices. (see tables below)
SPY Risk Analysis
We have not had the opportunity to set up a January SPY call spread, therefore the only trade risk is the S&P index continuing a downtrend and threatening our $135 strike price short put.
TLT Position Update ---------------------------------------------------------------
TLT closed at $123.31 on Friday â€“ the January position is approx. $300 in the black
The December 16th Couch Potato published a January expiration TLT put spread
The put spread is approx. $300 in the black (see tables below)
$120 strike price short put delta is -.2098 (79% probability this position will be profitable)
TLT Risk Analysis
We have not had the opportunity to setup a January TLT call spread, therefore the risk is a treasury bond price reversal threatening our $120 strike price short put.
GLD Position Update --------------------------------------------------------------
GLD closed at $160.54 on Friday â€“ the January position is approx. $300 in the red
The December 17th Couch Potato set up a January expiration GLD bull put spread
The put spread is approx. $300 in the red (see tables below)
$158 strike price short put delta is -.3085 (69% probability this position will be profitable)
GLD Risk Analysis
As confirmed in the GLD chart above, gold remains oversold and has not presented an opportunity to setup a January GLD call spread. Therefore the risk is gold prices continuing to crash and encroaching on our $158 strike price short put.
Anytime the market maker is willing to accept a limit price of less than .10 on one of our short strikes, we can buy back all the short contracts and sell the long positions on the same spread. However, if it is a week or so prior to the expiration date, we may be able to hold out for a .05 bid or lower.
If one of our short strikes is penetrated (closing price above below the short put) AND the delta rises to .65 we will look to close out this spread (buy the short contracts, sell the long) and roll it out to another short strike price. Unless this is option expiration week, do not panic and rush to close the trade, many times the market will reverse itself and remove the sense of urgency. If one of our short strikes has been violated and there is no price reversal, we cut our losses and live to fight another day.
Couch Potato Trader Disclaimer
All results reported in this section are hypothetical. While the numbers represented here may have been achieved or beaten by our readers, we make no representation that any individual investor achieved these exact results. The tracking for the plays listed in this section uses closing prices for the day the newsletter is published and it is not meant to imply that any reader actually received those prices (though many often do) or participated in these recommendations (even though many do). The portfolio represented here is hypothetical and for investment education purposes only. It is only an illustration of what type of gains a knowledgeable trader might receive utilizing these strategies. If you don't get close to these results, guess what. It isn't the fault of the strategies.